Stifel predicts stocks will be lower at the end of 2025 due to ongoing inflation and the economic slowdown

According to Barry Bannister, chief investment strategist at Stifel, the stock market will end 2025 below its current levels.

Bannister expects stubborn inflation will prompt the Federal Reserve to keep interest rates high as economic growth slows, serving as a key catalyst for the eventual decline in the stock market rally. Bannister expects the S&P 500 (^GSPC) to end 2025 in the mid-5,000s. As of Thursday afternoon, the S&P 500 was hovering just below its all-time high at around 6,070.

Among the more than 17 strategists tracked by Yahoo Finance who have listed 2025 year-end forecasts for the S&P 500, Bannister is the only strategist calling for a decline in the benchmark index in 2025. Bannister said on Wednesday Fundstrat research director Tom Lee said he believes the S&P 500 will rise by the middle of the year, the number fell to 7,000, before dropping to 6,600.

“The environment does not appear conducive to continued equity mania and we favor more defensive sectors,” Bannister wrote in a note to clients on Thursday. He added that slower economic growth would benefit the “defensive value” sectors, including healthcare (XLV), utilities (XLU) and staples (XLP).

Bannister expects the Fed to cut interest rates by 25 basis points at each of its next two meetings before embarking on an extended pause in rate cuts due to stubborn inflation and “zero financial transparency.”

Bannister said recent data shows inflation is not falling quickly to the Fed’s 2 percent target. This has led economists to believe that the Fed is likely to cut interest rates less in 2025 than initially hoped.

Strategists have argued that the size of the Fed’s rate cuts in 2025 is not the deciding factor in the stock market’s performance. Instead, they argue, the growth trajectory of the U.S. economy is key.

“The growth backdrop was a key driver (of the stock market rally),” Kevin Gordon, senior investment strategist at Charles Schwab, told Yahoo Finance. “So if inflation is still relatively stable but economic momentum is still relatively strong, which has been the case for most of this year, then I think the market can continue to perform well.”

The U.S. economy’s continued strong growth has been a key driver of many calls for the bull market to continue into 2025. Wells Fargo’s Christopher Harvey said he believes the S&P 500 will end at 7,007 next year, highlighting a “cyclical opportunity “catalyzed by upward revisions to GDP.”

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